Mega Collection of Financial History Papers By Edward Chancellor
I dedicate this collection of articles by Edward Chancellor to James Montier. Mr. Chancellor is the author of Devil Take The Hindmost, a book, that I recommend reading.
1. The Seven Pillars Of Folly – By Edward Chancellor – Click Here To Read The Article – Excerpt Below
The oil exporters of the Persian Gulf are flush with cash. Some of that money is going towards acquiring P&O, the British shipping concern, thus sparking off the heated controversy over foreign control of U.S. ports. This has led people to worry that Arab petrodollars might be scared away from the U.S. In fact, unlike during the last oil boom of the late 1970s, relatively little of the current Arab oil surplus has been directly invested in U.S. assets or even deposited in the international banking system. This time much of the oil money has remained at home where a classic speculative mania is now being played out.
2. Inefficient Markets – Corporate Eugenics – By Edward Chancellor – Click Here To Read The Article – Excerpt Below
It is becoming clear that corruption at Enron was not confined to the higher echelons, but was widespread throughout the firm. This corruption appears to have been engendered by a combination of overly-demanding profits targets and management’s practice of weeding out supposedly “underachieving” employees. Such practices have become commonplace among America’s top companies. In Enron’s case it seems that the crooks cooked up the profits, while the honest objectors were let go.
3. Look Out This Crunch Is Serious – By Edward Chancellor – Click Here To Read The Article – Excerpt Below
Incipient panic has reigned in U.S. financial markets over the past couple of weeks, and no wonder. Some hedge funds have blown up, the country’s second-largest mortgage lender has come close to collapse and stocks have fallen. On Friday, the Federal Reserve Bank lowered a key interest rate to help calm things down.
4. Ponzi Nation – By Edward Chancellor – Click Here To Read The Article – Excerpt Below
Credit has grown rapidly in recent years. This expansion has come in many forms, from home mortgages to newfangled structured products created by clever financial engineers. There are, broadly speaking, two views about these developments. The conventional wisdom — held by most economists and denizens of Wall Street — is optimistic. Higher rates of credit growth and increasing levels of leverage, they maintain, are reasonable in light of increasing economic stability. An opposing view — held by a miscellaneous bunch, including some notable investors and Wall Street observers — holds that the massive buildup of debt augurs ill. Drawing on the work of a little-known, deceased economist named Hyman Minsky, the pessimists contend that the recent calm has induced people to take on too much risk. “Stability is unstable,” this group says, quoting Minsky.
5. Ponzi Nation Topples – By Edward Chancellor – Click Here To Read The Article – Excerpt Below
On August 14, David Viniar, the chief financial officer of Goldman, Sachs & Co., struggled to explain why two hedge funds managed by his firm had suffered severe losses during the first few hectic days of the month. He came up with the rationale that the markets had been hit by a rare “25 standard deviation event.” In other words, an occurrence so rare that a person living since the dawn of time would be lucky to have witnessed it. The comment was, of course, far-fetched. History shows that financial crises are as inevitable as death and taxes.
6. Stabilizing an Unstable Economy: What Would Minsky Do? – By Edward Chancellor – Click Here To Read The Article – Excerpt Below
A year or so ago, the work of the late economist Hyman Minsky was known to only a small band of devoted followers. All that has changed since the onset of the current financial crisis. Today, Minsky’s financial instability hypothesis — the notion that economic stability encourages behavior on Wall Street and beyond that renders the financial system increasingly fragile — is attracting far more attention. Yet Minsky was interested not only in the buildup to a crisis but also in how depressions could be avoided and what measures were necessary to prevent future crises from occurring.
7. When the Credit Crunch Comes to Main Street – By Edward Chancellor – Click Here To Read The Article – Excerpt Below
Three centuries ago, the novelist and sometime tradesman Daniel Defoe described what happened when credit collapses: “If private Credit falls off, the Stock, the Trade, and, by Consequence, the Wealth of the Nation decays.” Modern economists tend to be more sanguine. As long as prices remain stable and the financial system continues to function, they see little lasting damage to the economy from a credit bust.
8. Spiraling Losses: Lloyd’s Unheeded Lessons – By Edward Chancellor – Click Here To Read The Article – Excerpt Below
In the recent years the business of lending has converged with that of insurance: Banks can insure the loans they make against default; securitization, which allows for risk to be divided up and parceled out, borrows much from traditional insurance practices; credit-risk models emulate actuarial calculations; and the risk premiums on loans aren’t much different from the policy premiums charged by conventional insurers.Insurance, like lending, is a highly cyclical business. When premiums are high and losses low, capital flows into insurance. But over time competition drives down policy rates. Premiums decline to the point where they are insufficient to cover liabilities. A crisis occurs that can only be resolved through losses and capital contraction.
9. Model Failure – By Edward Chancellor – Click Here To Read The Article – Excerpt Below
The Current Credit Crunch is the first in which mathematical models have played an important role. Common flaws in risk models link the failure of rating agencies to predict the level of defaults on subprime mortgages, the freezing up of the market for complex debt securities and problems at several dozen hedge funds and a handful of banks, including the U.K.’s Northern Rock. We handed over the job of assessing financial risk to mathematicians and physicists — and they failed.
10. Crisis Hazards – By Edward Chancellor – Click Here To Read The Article – Excerpt Below
The governor of the Bank of England has come under fire from all sides. First, at the onset of this summer’s credit crunch, he made himself unpopular by being less accommodating than his peers in Europe and the U.S. Then, after King agreed to provide emergency funding to the stricken Northern Rock, Britain’s fifth-largest mortgage lender was,he was accused of fostering moral hazard. This assistance inadvertently sparked the first bank run in England in over a century
11. Devil’s Dictionary – By Edward Chancellor – Click Here To Read The Article – Excerpt Below
Roughly A Century Ago- the American writer Ambrose Bierce compiled The Devil’s Dictionary. In his celebrated lexicon, Bierce displayed a profound understanding of finance, which he defined as “the art or science of managing revenues and resources for the best advantage of the manager.” …Although Wall Street’s ethos has not changed since Bierce’s time, it is time to update and enlarge the Devil’s Dictionary of…
12. Part 2 Of Devil’s Dictionary of Finance – By Edward Chancellor – Click Here To Read The Article – Excerpt Below
M * Mark-to-model: The use of a mathematical model to value complex securities. “The combination of precise formulas with highly imprecise assumptions can be used to establish practically any value one wishes” (Benjamin Graham). Useful to investors who wish to delay the recognition of a loss. See CDOs.
Master limited partnership: A clever corporate structure favored by private equity and hedge funds for going public. Provides investors with few governance safeguards while allowing asset managers to avoid paying corporate taxes on their earnings.
13. The Case For Crash – By Edward Chancellor – Click Here To Read The Article – Excerpt Below
Never before in recent history have the prospects for investors appeared so dismal. This statement may seem absurd. After all, economies around the world appear more stable than ever. Stock markets aren’t so evidently buoyed by irrational exuberance as they were in the late 1990s. Furthermore, the alternative-assets revolution has greatly expanded the range of potential investments. But that’s no comfort when just about every major asset class is perilously overvalued.
14. A Very Private Matter – By Edward Chancellor – Click Here To Read The Article – Excerpt Below
A letter from Stephen Schwarzman, chairman and chief executive, regarding the proposed buyout of Blackstone Group June 1, 2012 The Blackstone Group 345 Park Avenue New York, NY 10154 Dear Shareholders: I am, together with funds managed by our Þrm, pleased to propose to acquire, for a purchase price of $15 in cash per unit, all of the Þrm’s outstanding common units, representing limited partners’ interests in Blackstone Group L.P. (the “Group”). We are also offering to purchase the Chinese government’s minority stake on the same terms. Our proposal provides a substantial premium to the current price for all of the Group’s common unit holders.
15. Structural Flaws- By Edward Chancellor – Click Here To Read The Article – Excerpt Below
When banks discovered how to securitize loans, they inadvertently created a sexy alternative investment. Looking for an asset that isn’t correlated to the stock market? Then invest in mezzanine tranches of collateralized debt obligations. Or better still, give your money to a credit hedge fund that promises to produce double-digit returns. Rampant demand for structured securities has been a boon to bankers, homeowners and private equity firms. It has also led to the mispricing of credit risk. But participants in this brave new world of finance have little cause to worry about that. Last year some $304 billion of collateralized debt obligations were issued in the U.S., according to Credit Suisse. That represents a 58 percent increase over the previous year.
16. Shaky Foundations – By Edward Chancellor – Click Here To Read The Article – Excerpt Below
Pension funds are looKing for investments that will perform even when the stock market is doing badly. They also want long-lived assets to match the payments they must make in years to come. Inflation-protected government bonds, especially those with long durations, fit the bill. The trouble is that yields on such bonds have declined dramatically in recent years.
17. Fixated on Friedman – By Edward Chancellor – Click Here To Read The Article – Excerpt Below
The severity of the credit crunch has taken the world’s central bankers by surprise. But they might have foreseen it had they not been intellectually enslaved by the ideas of the recently-deceased über-economist, Milton Friedman.
18. A Sucker’s Rally- By Edward Chancellor – Click Here To Read The Article – Excerpt Below
Some argue that the stock market downturn was too shallow
19. Misplaced US Optimism – By Edward Chancellor – Click Here To Read The Article – Excerpt Below
Two months ago, the stock market was telling us that deflation was on the way and that the US economy would be leading the world into a global recession. Since then the market has staged a strong rebound and people are feeling more optimistic again. My feeling, however, is that the excesses of the late 1990s bubble have only partly been dealt with and that until they have properly worked their way out of the system, the real recovery will remain elusive.
20. A Golden Age – By Edward Chancellor – Click Here To Read The Article – Excerpt Below
Over the last 30 years, we have witnessed runaway inflation, a variety of speculative bubbles and a succession of currency crises. Is there no way to escape this mayhem, which spreads its misery from the day-labourers of Buenos Aires to the pensioners of New York? In fact, one solution offers itself; an idea so unpopular that only a handful of cranks nowadays even dare consider it. In order to rid the global economy of its chronic instability, we must return to our golden fetters.
21. Corporate Crisis – By Edward Chancellor – Click Here To Read The Article – Excerpt Below
Don’t blame the scandals After the string of corporate scandals in the US, the public is blaming the destruction of trillions of dollars of “shareholder value” on the malfeasance of top management. This is misguided.
22. Perverse Incentives – By Edward Chancellor – Click Here To Read The Article – Excerpt Below
Shareholder value and stock options for senior managers have ruled big business since the 1990s. But they have led to costly mistakes and endless scandals
23. Daniel Defoe On RailTrack – By Edward Chancellor – Click Here To Read The Article – Excerpt Below
In last month’s Prospect, Richard Lambert, the former editor of the Financial Times, asked why the press had failed to see Enron coming. He acknowledges that part of the failure lies in the mood of the times. Unfortunately, he does not go far enough. It was, after all, a TMT (technology, media and telecoms) boom, and the Financial Times was at the heart of it. Just over two years ago, Pearson, owner of the FT, was applauded by the market for raising hundreds of millions of pounds to invest in internet ventures: FT.com was soon followed by FT Marketwatch.com, FTyourmoney.com, and so on.
24. A Bad Time For Pundits – By Edward Chancellor – Click Here To Read The Article – Excerpt Below
Bad year for forecasters Like Christmas trees, economic forecasts should be discarded early in the new year. Anyone who retains a forecast too long will find it wilting more rapidly than an ageing spruce. At times of heightened economic uncertainty, such as we have recently been living through, forecasts have even shorter sell-by dates.
25. City Slackers – By Edward Chancellor – Click Here To Read The Article – Excerpt Below
When foreign financiers stripped London of its snob class, the money woke up. But to stay slick, the city needs to regain an old honour system
26. Alan’s Bubble – By Edward Chancellor – Click Here To Read The Article – Excerpt Below
Alan Greenspan, the second most powerful man in the US, adheres to the “radical capitalist” of Ayn Rand. But by following rather than leading the markets he has created a bubble
27. Millenial Market – By Edward Chancellor – Click Here To Read The Article – Excerpt Below
The stock market was unperturbed and the Dow Jones Industrial Average closed a point up on the day of the attack, at 88.63. However, the economy was suffering from the post-war slump and over the next 12 months shares lost half their value. No one was ever prosecuted for the “outrage,” as it became known, although many suspicious-looking foreigners were arrested in the months and years that followed. As time passed people’s fears waned, and soon the great bull market arrived. On the ninth anniversary of the bombing, the Dow Jones stood at 372, up more…
28. Tacit collusion – By Edward Chancellor – Click Here To Read The Article – Excerpt Below
Prisoner’s dilemma at Sotheby’s Alfred Taubman, the majority shareholder and former chairman of Sotheby’s, was recently sent to prison for his part in a conspiracy to fix prices with rival auctioneer, Christie’s. Sotheby’s former chief executive, Diana “DeDe” Brooks, was also convicted. The trial judge accused the two of many failings, including arrogance, greed and deceit. From a business perspective, their real crime was stupidity.
29. Housing blarney – By Edward Chancellor – Click Here To Read The Article – Excerpt Below
House prices and the planners House prices are overvalued, say the experts. At least, that’s what they said last year. In the last 12 months, however, the average price of a British home has risen by a further 18 per cent. This doesn’t mean that the housing bears were wrong. Rather, it is a reflection on the inefficiency of the housing market, which in this country might have been designed specifically to provide an endless cycle of booms and busts.
30. Lessons Of Depression – By Edward Chancellor – Click Here To Read The Article – Excerpt Below
In a recently published book, Rethinking the Great Depression, economic historian Gene Smiley catalogues the errors of both the Federal Reserve and federal government during the 1930s. In July 1931, the Fed raised interest rates in order to fulfill its obligations under the gold standard (despite the fact that Britain had already abandoned it). Five years later, prompted by fears of inflation, the Fed doubled the reserve requirements of its member banks. Both of these actions were followed by a severe contraction of the money supply, which induced a further collapse of the stock market and economy.
31. Technology & Path Dependency – By Edward Chancellor – Click Here To Read The Article – Excerpt Below
Does the best technology always win out? Some economists say no. They have argued in recent years that chance often plays a decisive role in the adoption of technologies and that advantage normally goes to the first-movers in a new market. During the bull market, such views were widely accepted and served to hype the tech bubble. In more sober times, the same claims are receiving the scepticism they deserve.
32. The Croupier Takes Too Much – By Edward Chancellor – Click Here To Read The Article – Excerpt Below
The greatest problem facing equity investors today is not the bear market or the weakness of the global economy. Nor has it anything to do with the possibility of war, high levels of corporate and consumer indebtedness, or any of the other problems one reads about regularly in the business pages. The real problem is the low levels of expected returns for most stock market investors. This is due primarily to the high levels of fees extracted by a bloated and parasitic financial services industry. Charlie Munger, the right-hand man of Warren Buffett, refers to these fees as the “croupier’s take.” Let us attempt to gauge its size.
33. Shares have been in a bear market for years. We just haven’t noticed until now – By Edward Chancellor – Click Here To Read The Article – Excerpt Below
Bear markets are naturally unpopular: people dislike seeing their investments go up in smoke. They are also misunderstood. It is commonly believed that bear markets are short-lived, ending after a few unpleasant months. That’s true of little bears, but great bears can hang around for a decade or more. They are characterised by the savage crushing of investors’ hopes. Most commentators argue that British and US investors hadn’t until very recently experienced such a market for more than quarter of a century. Actually, we are already some years into one.